Dow Transportation Average ETF (IYT): Itching For Upside

Today, we’re going to take a look at the iShares Dow Jones Transportation Index Exchange-Traded Fund (IYT). Within the Dow Transports you’ll find sectors that include airlines, shipping, railroads, delivery companies, truckers, etc. With President Obama’s gauntlet of stimulus packages, the IYT may soon find some strong support and offer investors attractive valuation for years to come, especially in the railroad industry.

Let’s head to the charts.

This particular graph was plotted about over the course of five years. Divergence buy and sell signals do not happen often, but when they do, investors should pay attention. I went back five years because I wanted to show you just how powerful these indicators can be if used correctly.

When the IYT was beating the bullish drum in ‘05 and ‘06, the warning signs were already being painted on the wall. MACD and DMI indicators began to trend down while price slowing being drained of its ability to sustain past price acceleration. Eventually, price did top out at around $100/share, but even if you got out near $90 when the signal was given, you’d be much better off today holding the bag near today’s prices. Now, I sincerely hope that you were not one of the victims. If you are, or simply someone looking for a potential contrarian play, then IYT would certainly fit the bill.

Dow Transports Leaving the Station

You see, things began to turn around in late ‘08. Ok, so even if the economy, and the transports for that matter, were about to take a serious tumble, bullish counteracting forces were already being established. It could be that the market was pricing in significant stimulus and spending on infrastructure - who knows. I’m not necessarily interested in the story as much as I am with the indicators and their ability to pick up on the smart money.

In the chart above, I’ve marked the bullish divergence in green. Although it may take a few months or so to see a “V” or double bottom, what we can take away from this bullish signal is that money is flowing back into this sector and current prices should be considered favorable going forward. And if you’re short the transport securities, now may be a good time to take some profits off the table.

If you were to do a search for commentary on this ETF, you’ll realize fairly quickly that the discussion is a bit dry. Just because someone isn’t talking about this ticker or sector doesn’t mean it isn’t attractive. A contrarian investor seeks prices trading at a discount with potential bullish prospects going forward. Sometimes, it just takes a little patience and foresight. If you understand why many of the top performing funds fail to make the top 10 list in the following year, you’re already many steps ahead of the competition.

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